One of the most important decisions I make as a business owner after acquiring a company is what to do with profits. Do I reinvest them back into the business to fuel growth, or do I take them out as distributions to myself and other owners?
When I was new to acquisitions, I thought the answer was obvious: take distributions. After all, isn’t that why you buy a business to get paid? But over time, I’ve learned that the decision isn’t that simple. The right balance between reinvestment and distributions can determine whether a company thrives long-term or stalls out.
In this article, I’ll share how I approach this decision, the mistakes I’ve made, and the framework I use today to balance growth and reward.
Why This Question Matters
Profits are finite. Every dollar taken as a distribution is a dollar not reinvested in growth. Every dollar reinvested is a dollar I don’t put in my pocket today. The decision shapes the trajectory of the company.
Handled well, reinvestment compounds growth and builds enterprise value. Handled poorly, it leaves owners starved of returns or the business underfunded.
That’s why I treat this as a strategic decision, not just a financial one.
My Early Mistake
In one of my first acquisitions, I was too eager to pull cash out. I distributed profits aggressively, leaving little reinvestment capital. At first, it felt great. But soon, I realized the business needed new equipment, better systems, and marketing investment. Without reinvestment, growth slowed, and expenses piled up.
That experience taught me to think longer-term. Distributions feel good in the short run, but reinvestment builds lasting value.
The Case for Reinvestment
Reinvestment allows the business to compound. The best uses of reinvested profits are those that directly increase earnings or reduce risk. Some examples include:
- Upgrading systems: Investing in software or infrastructure that improves efficiency.
- Marketing and sales: Expanding reach to win new customers.
- Talent development: Hiring or training employees to strengthen the team.
- Capacity expansion: Adding equipment, inventory, or space to serve more customers.
- Debt reduction: Paying down loans to reduce interest costs.
Each reinvested dollar has the potential to multiply future returns.
The Case for Distributions
At the same time, distributions matter. They reward the risk and effort of ownership, provide liquidity, and make acquisitions worthwhile. For partners and investors, regular distributions are often expected.
Taking money off the table also reduces personal risk. Leaving every dollar in the business can feel like overexposure.
My Framework for Deciding
Today, I use a framework to balance reinvestment and distributions:
1. Cover the Basics
I ensure the business has enough working capital, reserves, and debt coverage before deciding anything. Stability comes first.
2. Identify High-ROI Investments
If there are opportunities to reinvest that clearly produce returns above what I could get elsewhere, I prioritize reinvestment.
3. Balance Owner Needs
I also consider the needs of myself and my partners. If distributions are necessary to meet commitments, I factor that in.
4. Maintain a Consistent Policy
Unpredictable swings between reinvestment and distributions create frustration. I try to set a consistent, transparent policy.
5. Think Long-Term
I ask: will reinvesting today create far greater distributions tomorrow? Often, the answer is yes.
Mistakes I Still Watch For
I’ve made mistakes by over-reinvesting as well. In one business, I reinvested so heavily that I starved myself of returns for years. That created frustration and strained partner relationships.
The lesson: balance matters. Too much distribution hurts growth. Too much reinvestment hurts owner morale.
Why This Decision Impacts Valuation
Reinvestment also impacts valuation. Businesses that reinvest wisely grow faster and command higher multiples. Over time, that creates far greater wealth than constant distributions.
That’s why I often lean toward reinvestment, especially in the first few years after an acquisition. Once the business is stable and growing, I allow more distributions.
Final Thoughts
Deciding between reinvestment and distributions is one of the most important and nuanced choices I face as a business owner. It’s not about choosing one or the other, it’s about balancing both in a way that sustains growth and rewards ownership.
I’ve learned to treat reinvestment as the fuel that drives long-term value and distributions as the reward that makes ownership worthwhile. The art is in finding the right mix at the right time.
I continue sharing my frameworks for acquisitions, private equity, and real estate at DrConnorRobertson.com, where I document how I make decisions that shape long-term success.